This piece first appeared in The Daily Telegraph on 16 February 2002
The text here may not be identical to the published text

Government admits blunder

Unravelling a long-standing tax error affecting many veterans

The Government has admitted this week that it is still "unable to establish the exact facts" over the extraordinary blunder that left thousands of disabled army veterans paying tax on what should have been tax-free service pensions. The Minister responsible for Veterans Affairs, Dr Lewis Moonie, told the House of Commons that the mistake could have begun as long ago as 1919 when the pensions paid to people who left the army on medical grounds were first exempted from tax. And The Daily Telegraph has learned that the exemption from tax applies to pensions paid on medical grounds not only to soldiers but to men and women who nursed them as well.

Among the things the Government does not know is how many people are affected. A four year investigation of army pension files has identified 1003 cases where compensation is due and all but 14 of those have been paid at a total cost of £6.5 million – around £6500 each on average. When the error was revealed in The Daily Telegraph last week, Dr Moonie said that the total costs of compensating people could be as high as £30 million, implying that there were still another 3500 veterans or their descendants to be found. But on Monday he withdrew that, telling MPs that "my estimate of £30 million was a generous one. I do not anticipate that it will take as much as that to cover the matter."

The current law which grants this concession is the Income and Corporation Taxes Act 1988 s.315. It repeats words used since the original 1919 Finance Act and refers to eight separate classes of pension. In essence the ones affected are those paid

· to a member of the regular army or its nursing auxiliary,

· who left service due to medical unfitness, and

· that condition was due to, or made worse by, his or her service in the forces.


The injury does not have to be due to combat or active service – tripping in the mess in the UK would count just as much. And it does not have to have been actually caused by service – if it was aggravated by it then that counts too. The problem only affects pensions paid by the army because the navy and air force managed to get it right and pay them free of tax

Over the years these pensions have gone under various names. In the distant past they were called ‘wounds pensions’; then ‘army invaliding pensions’; now they are known as ‘service attributable pensions’. But broadly speaking anyone who served in the regular army or nursing auxiliary, regardless of whether they saw active service, who left the army for medical reasons which their service had caused or worsened may have had tax wrongly deducted from their army pension. If so, the tax deducted can now be refunded. In addition they should get some compensation from the Inland Revenue – called repayment supplement – which represents the interest lost on the money over the years. It is not clear if this being paid automatically or not.

Those who served in World War II (or I) are in a more complicated position. Most of the men and women who served then were not in the regular forces – they were conscripts and had no rights to service pensions, which are paid only to members of the regular armed forces. If they were injured in service they can claim what is called a war disablement pension. That is paid through the War Pensions Agency and is available to anyone – including conscripts – whose service in the forces has led to a disability. Although now paid by the Ministry of Defence, they were until recently paid by the Department of Social Security and have always been paid gross – usually in cash through the Post Office – and were counted as free of income tax.

However, anyone in the regular army or its nursing auxiliary during World War II or earlier may have been paid a pension after leaving the army on medical grounds. If that pension was taxed they or their heirs may now be entitled to a refund of the overpaid tax and compensation. The Government has made it clear that where the pensioner has died his widow or descendants will get the money if they can be traced.

The man who forced the Ministry of Defence to recognise its mistake and find the people affected is Major John Perry. He says there is still widespread confusion about the law within the army pensions office – especially about conditions that were made worse by service.

"The Act says ‘attributable to or aggravated by’ but they are only applying it where the pension was attributable to service. I don’t believe there is anyone who understands this including the people who work in the pensions office at the MOD. Of course, leaving it in a muddle means that people will die before they get what they are entitled to. It would be farcical if there were not thousands of widows who have given their lives to looking after broken soldiers who still do not know they could have thousands of pounds owing to them."

Applications for refunds should be made in the first instance to the Army Pensions Office, PM480 Kentigern House, 65 Brown Street GLASGOW G2 8EX.

16 February 2002

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